Growing investment with online-security stocks

Prominent examples such as the recent attacks on Sony or Target prove it: Protection against online attacks is becoming increasingly important. This trend speaks in favor of acquiring shares of Internet security specialists.  

Experts in all fields constantly search for the newest and hottest trends. This is true in particular in the stock market, where identifying the best trends is often treated as synonymous with future share price gains. For 2015, many experts predict an increasing danger of online crime, but you don´t need prophetic gifts to arrive at this conclusion. You only have to watch the news.  

The recent online attack on entertainment giant Sony demonstrated how real the threat is from the virtual world. Moreover, this was not an isolated case, as previous attacks on corporations such as Apple, Anthem, JP Morgan, Home Depot and Target prove. 

It’s not only American or Japanese companies that are affected. Cybersecurity risks have become a worldwide problem. A survey conducted by consulting firm KPMG, for example, shows how vulnerable companies are in Germany.  

Some 30 percent of the surveyed companies were victims of identity theft or misuse of data in the past two years alone. However, the threat is not just at the corporate level, but also extends to individuals. According to the Cybercrime Report released by Norton/Symantec, 18 people a second become victims of criminal attacks on the Internet by fraud, espionage and blackmail. Finally, the worldwide increase in digitalization offers cyber criminals a larger working space. 


Hacking increase inevitable  

According to security software maker ESET based in Slovakia, the Internet of Things will be used by hackers as a new toy, since it connects more and more devices to the Internet and thus makes them more vulnerable. ESET has identified digital payment systems as another big security risk since these systems irresistibly attract malware.  

Further, Chief Technology Officer Raimund Genes of Japanese IT security vendor Trend Micro advises everyone to get mentally prepared for the possibility of being hacked. 

This threat to the community, however, is a huge business opportunity for companies that specialize in security software. Global market research firm Allied Market Research predicts estimated annual growth of 8.1 percent between now and 2020 in the area of Internet security. That seems plausible since politicians and other officials now recognize cyber crime as a serious threat and have started to implement tougher security laws and measures.  

In Germany, for example, the Federal Cabinet has recently established an IT Security Act. It allows for the payment of damages if malware is distributed via a website of a company that is not equipped with the latest cybersecurity technology. In the U.S., the dismissal of Target CEO Gregg Steinhafel in the wake of the retailer’s highly publicized and damaging data breach will most likely encourage other corporate CEOs to put more money into IT security solutions. 


Worth buying  

Given this favorable outlook for cybersecurity-related software, the keen interest of investors in shares of this sector is hardly surprising.  

Credit Suisse Portfolio Manager Patrick Kolb, who is also convinced of this investment idea, said: “We believe this investment theme is very attractive for long-term investors as it is just at the beginning of an attractive long-lasting growth cycle.” 

IT giants like Intel and Cisco Systems have also recently strengthened their presence in the cybersecurity area. Though Intel’s share of total sales from security crime services is still relatively low, with regard to overall market share in the segment, Cisco is already the market leader.  

With the purchase of shares of Cisco, investors get access to the cybersecurity investment at a much lower valuation (price-earnings rate for 2015: 13.2) than is usually the case in this segment. On average, the listed industry representatives are already valued quite high.  

This applies to Fiserv, where the estimated price-earnings rate for 2015 is higher than 21, but the provider of technology solutions for the financial industry is also expected to increase its profits per share at an annual rate of 11.5 percent in the coming five years. The stock also shows an impressive long-term uptrend. 

More purebred sector members than the first two mentioned are Check Point Software and Symantec. Check Point Software, founded in 1993 in Israel, is considered number two in the industry and as more reliable than some hotly traded novices in the field.  

The same applies to U.S. software company Symantec, founded in 1982, which has proposed splitting the group into two separate areas – security and information management.  

There is also a lot of potential in FireEye, which was listed in 2013. The U.S. security specialist firm recently completed a joint venture with Deutsche Telekom and is focused on the security of smartphones and social networks, two particularly strong growth areas. Still, the company has losses, which increases the risk. 

An alternative  

Company-specific risk, such as at FireEye, can at least be partly reduced by getting exposure to this investment theme via investing in PureFunds ISE Cyber Security ETF (ticker symbol HACK). This ETF tracks the ISE Cyber Security Index, which is currently composed of 31 companies focused on protecting against cyber crime.  

Since the ETF began trading on Nov. 12, it has managed to perform better than the S&P 500 Index and should continue to do so. But to prevent your portfolio from being “hacked” by losses in the case of an unexpected market downturn, it is advisable to protect all investment positions in the cybersecurity sector with stop-loss-orders.